5 Ways that Businesses Measure Cash Flow

Businesses don't just grow on trees. They're "planted" with seed money and nurtured with continuing financing. Cash flow from financing is the way that businesses track the inflow and outflow of cash from both debt and equity financing.

Taking out a loan is an example of financing through debt. When a company receives the loan, it provides a direct inflow of cash. As the company pays off the debt through principle and interest payments, the cash flows back out.

Equity financing for a public company is acquired through the issuing and selling of stock. When an investor buys stock in a company, that money is used to fund business operations. In return, the shareholder is entitled to a share of the profits, called a dividend. The shareholder can either cash in his dividend or re-invest it in more stock. The money earned through the sale of stock is "cash in" and the payment of dividends represents "cash out."

Companies can also raise money through the issuing and selling of corporate bonds. Once again, the money raised is "cash in" and interest paid to bondholders is "cash out."

Cash flow from financing and investment are both examples of non-operating cash flow. As an investor, it's tempting to focus on cash generated through the core business operation. But it's equally important to understand how a company funds its operation and how it manages its debt and equity obligations. Over the long term, stable and prudent management of assets and liabilities often trumps short-term gains in earnings.

Next we'll look at one of the most significant cash flow measurements for investors: free cash flow.